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What product managers need to know about positioning products to create value

Today we are talking about how market segmentation is done and how it impacts product pricing.

To help us with the details, a product strategy and pricing expert is joining us, Dan Balcauski. Dan is the founder of Product Tranquility, a consulting firm based in Austin, Texas. He has 15 years of experience in managing multiple products throughout different life cycles, from start-ups to publicly traded multinational enterprises.

Summary of some concepts discussed for product managers

[2:05] What is product strategy?

Product strategy is the art and science of understanding customer problems and aligning your organization around creating desirable outcomes for customers and your business.

Problem management is more important than product management for product managers. Be obsessed about your customers’ problems. Strategy defines a current situation, an assessment of that situation, and a path forward to overcome the challenges you face. Product strategy is about orienting the company toward the problems you’ll solve and how solving those problems for customers will positively impact the business.

[4:07] How does market segmentation influence product strategy?

In customer research, we’re trying to understand what problems our customers face and how much they value solutions to those problems. Imagine you’re a general trying to guide your troops. You have a landscape of different hills you could traverse, and you need to understand the possible advantages, disadvantages, and constraints of taking any particular hill. In market segmentation, you’re trying to understand the opportunity, challenges, and advantages of taking any particular position in the market. Once you’ve outlined the market landscape, product strategy is the process of deciding where you can compete and win.

[6:34] What’s an example of a company that does market segmentation well?

Tesla’s first car was the Tesla Roadster at a price point of $250,000. Eventually, Tesla created the Model S at a slightly more reasonable $80,000, and now they have the Model 3 at $35,000. This is a perfect example of understanding customer segments and aligning product strategy to sequentially attack those different market segments. Elon Musk understood the electric motor has a distinct advantage over combustion engine vehicles: It can deliver power directly to the wheels. The Roadster could easily beat a Porsche or Ferrari in speed. Tesla found a group of people who were willing to pay for that. Their market segment for the Roadster was very high-end people who wanted their 0-60 speed to be the best in the world. These customers didn’t care as much about an established, long-range, national charging network, which was not in place when the Roadster came out. Elon balanced the segment he went after with the value drivers of that segment. He aligned the benefits of the product with the customers who were willing to pay for those benefits and aligned the capabilities of the company to execute his strategy.

[10:07] Where do we start with market segmentation?

• Start at the top leadership of your company and make sure your executives understand segmentation is important; many leaders think they’re going to capture the entire market.
• Start early. Proper customer segmentation helps every part of the organization. It’s unsuccessful to build a product without a segment in mind and hand it off to marketing and tell them to position it for a particular segment. Understanding whom you are building for makes the prioritization of features much easier as you’re building.
• When you’re segmenting, you’re creating groups that have homogenous customer needs within a segment but heterogeneous customer needs between segments, while balancing the ability of the company to manage all those diverse interests.

[13:34] Tell us about methods for segmentation.

There are two methods we use: a priori (before) and post-hoc (after).

First, we use a priori because it allows us to have an easy conversation about segmentation and leverages expertise of those on the team. A priori segmentation uses existing research or segmentation schemes like customer geography, company size, and industry vertical. One advantage of this method is it groups customers who are alike. It is fast and cheap because it uses publicly available or easily accessibly data. One drawback is that it doesn’t help you understand why customers buy certain benefits; also, existing segmentation schemes may not fit your exact business context or purpose. This method is useful for surfacing assumptions and areas of disagreement or risk.

Next, we do post hoc segmentation. We dig into the underlying customer value drivers. We start with the customers’ view of the world to understand what drives them to make purchasing and usage decisions. We use tools like Jobs-to-be-Done, external market research, and customer interviews, and do a quantitative assessment based on research and statistical analysis. We arrive at personas based on how customers look at value. This approach is better than a priori for a particular business outcome because it’s contextualized to how the segments will be used. However, it is more costly and time-consuming and may require special statistical tools.

We approach segmentation by focusing on common problems customers need solved, and less on the demographics of each segment.

[20:19] Tell us about the data you use in segmentation.

I categorize data as general or product-specific and observable or unobservable. General data don’t change based on the product; e.g., company size. Product-specific data do change; e.g., the target end user. Observable data include characteristics like company size and geography. Unobservable data come from interviews and help you understand situations, context, motivations, and relevant competitive alternatives. A priori segmentation uses observable data, while post hoc segmentation uncovers deeper unobservable data.

[27:12] How does segmentation impact pricing?

Price defines how a buyer and seller divide value in a transaction, so all pricing conversations center on an understanding of value. However, as we saw in the Tesla example, different segments perceive value differently. They have different relevant competitive alternatives, which are important because the only value you can price is differentiation value.

Pricing also includes packaging. Good packaging reduces sales friction, decreases sales cycles, and makes it easier for customers to understand your product and self-select the option that’s best for them. Packaging needs to be aligned with segments as well.

[28:39] What do you mean by packaging?

Packaging doesn’t have to be a box. Packaging is putting together features in a way that resonates with your audience and doesn’t make them choose from a thousand items. For example, most SaaS tools have good, better, and best packages. Don’t overwhelm customers with value or they’ll leave. Give them a set of choices—not too many and not just one. Understanding your segments first really assists packaging.

[30:43] Why do we need packaging?

The goal is making the company’s go-to-market motion as efficient as possible by reducing drag on marketing, sales, and customers. You want to maximize how fast customers grasp the idea that your product provides value for them.

LinkedIn packages well. They provide a basic social network for business, but they also have LinkedIn Premium Business, Recruiter, Job Seeker, and Sales Navigator. They’ve identified the different segments that use LinkedIn, and made customers’ buying choices easy.

Action Guide: Put the information Dan shared into action now. Click here to download the Action Guide.

Useful links:

• Connect with Dan on LinkedIn
• Check out Dan’s website, ProductTranquility.com
• Learn more about segmentation from Dan’s article

Innovation Quote

“If you’re not thinking segments, you’re not thinking.” – Theodore “Ted” Levitt

Thanks!

Thank you for being an Everyday Innovator and learning with me from the successes and failures of product innovators, managers, and developers. If you enjoyed the discussion, help out a fellow product manager by sharing it using the social media buttons you see below.